11 terms of shipment and delivery for use in contracts for the business-to-business sales/purchases of tangible, portable goods, provided by the International Chamber of Commerce for implementation 1/1/11.

Country neutral, but for international use are influenced by the United Nations Convention on Contracts for the International Sale of Goods (CISG).

Available worldwide through nearly 100 International Chamber of Commerce National Committees.

Drafted in (British) English and are in the process of translation into numerous languages. (Incoterms 2000 was available in over 35.)

Legacy to a long tradition of international use since 1936 (including recognition by the United Nations Commission on International Trade Law – UNCITRAL).

Written to reflect rather than dictate trade practice, incorporating the views of trade practitioners rather than legislators.

Always abbreviated by a three character English language acronym.

Always accompanied by a geographic place – the more precise the better.

Updated to reflect current trade practice and subject to future replacement as necessary (recent average lifespan = 10 years).

Self contained.

Used exclusively in sales/purchase contracts (“sales contracts”)>

Referred to throughout as “Incoterms rules.”

INCOTERMS® 2010 Rules Are Not:

They must be specified in order to apply. (abbreviation + place + Incoterms 2010)

All inclusive. Cannot address such issues as customary operations of carriers, ports, trades, government regulations, etc.

WHAT INCOTERMS® 2010 RULES DO

Divide costs, risks and responsibilities between sellers and buyers.

Guide one or the other party into subsidiary contracts required to fulfill designated tasks such as contracts of carriage and contracts of insurance.

Mirror seller-buyer responsibilities in 10 task categories.

Serve as handy checklists for sellers and buyers.

Provide a handy shorthand by reducing pages of text to 3 letters and a place.

Address new issues such as “string sales,” new institute insurance clauses and cargo security.

Reduce the potential for seller-buyer misunderstanding.

WHAT INCOTERMS® 2010 RULES DON’T DO

Address passage of title. However, other rules may be based on issues addressed by Incoterms® rules such as delivery, transfer of risk, transfer of cost, etc. Ownership passage should be specified elsewhere, or become an operation of the governing law. (Note for international transactions: the CISG is also silent about title transfer.)

Address recognition of revenue. However, other rules such as GAAP, IFRs and SEC regulations consider issues addressed by Incoterms® rules such as delivery and transfer of risk, etc.

Address remedies for breach of contract, although there are some provisions for premature transfer of risk and cost in case a party fails a particular obligation.

Address more than one contract. “Drop shipments” normally involve more than one contract, and the use of more than one Incoterms® rule may be appropriate.

Automatically apply. They must be specified.

Define the term “customary.”

Refer to “ship’s rail” which changes the delivery point for FOB, CFR, CIF.

Define vessel loading which can differ by product and vessel type.

Specifically address payment for the contract goods. (B1 is very general.)

Resolve all possible problems in trade.

DEFINITIONS

The following definitions will greatly assist you in understanding Incoterms® 2010 rules. All but “delivery” are additional to those found in the Introduction to Incoterms® 2010 pages 10 and 11.

Pre-carriage – inland transportation on the seller’s side. International: from the place where the shipment starts to the departure point on the seller’s side. Domestic: from the place where the shipment starts to subsequent carriage.

Main carriage – International: transportation from the point of departure on the seller’s side to the arrival point on the buyer’s side. Domestic: subsequent transportation beyond pre-carriage.

On-carriage – International: transportation from the arrival point on the buyer’s side. Domestic: subsequent transportation beyond main carriage.

Door-to-door – a contract of carriage including pre-carriage, main-carriage and on-carriage.

Door-to-port (or airport) – a contract of carriage including pre-carriage and main carriage.

Port (airport)-to-port (airport) – a contract of carriage for main carriage only.

Port (airport)-to-door – a contract of carriage including main carriage and on-carriage.

Omni-modal – those Incoterms® rules that may be used for all modes of transport: EXW (really non-transport) FCA, CPT, CIP, DAP, DAT, DDP

Marine-restricted – those Incoterms® rules that may be used only for carriage by vessel: FAS, FOB, CFR, CIF.

On-board – a marine transport document noted as “on board” and bearing the date that the described goods were physically loaded on the carrying vessel. On board documents are appropriate to FOB, CFR and CIF which specifically task the seller with vessel loading.

Received for shipment – a transport document evidencing that a named carrier has received described goods for shipment. Although it may indicate the vessel name or flight numbers, this document may be and usually is issued prior to actual transport.

Delivery – indicates where the risk of loss passes from seller to buyer.

Shipment contract – a type of sales/purchase contract under which the seller’s responsibility ends when the contract goods have been handed over to a carrier (i.e., the seller delivers by shipping). EXW, FCA, FAS, FOB, CPT, CIP, CFR and CIF Incoterms® rules are used in shipment contracts.

Arrival contract – a type of sales/purchase contract under which the seller’s responsibility ends when the goods have arrived at the agreed place (i.e., the seller delivers when they arrive). DAT, DAP and DDP Incoterms® rules are used in arrival contracts.

Revenue recognition – when a sale becomes an account receivable under such accounting rules as GAAP, IFRS and SEC regulations. As a seller decision to choose one of the Incoterms over the other will determine when the transfer of risk and responsibility is passed on so that they can “ring the cash register”.

Party at risk – The party that has most to lose in case of casualty to the contract goods. Normally, this is sellers up to the delivery point and buyers beyond it. However, there may be special circumstances that increase the risk for one or both parties.

Minimum cover – This very limited coverage is the default position for CIP and CIF. It corresponds to the American term “Free of Particular Average (FPA)” and the more widely used Term “Institute Cargo Clauses C.”

“All Risks” – A misleading term for comprehensive insurance as it does not really cover all risks. War and Strike, Riot and Civil Commotion are normally not covered and should be considered, as well as coverage on a warehouse-to-warehouse basis. It roughly corresponds to Institute Cargo Clauses A (which should also be enhanced by War and Strike coverage). Check with your insurer as the Institute Cargo Clauses were rewritten effective 2009. Also, there are new perils such as piracy.

THE F-GROUP INCOTERMS® RULES

All F-Group rules are used in shipment contracts.

International Use:

The buyer contracts for main carriage and therefore in charge of carrier and usually also forwarder selection. With F-Group rules the buyers are actually the shippers.

Sellers

F-Group rules provide little advantage for sellers except possibly that there is less work involved. They increase the risk with documentary-driven payment terms by reducing the seller’s documentary control. F-Group rules task the seller with export clearance.

Buyers

F-Group rules are usually the result of the buyer’s stronger negotiating power vis a vis carriers or sellers, or seller indifference. These rules favor informed buyers by providing control of main carriage and the resulting documentation. Frequent carrier selection results in lower negotiated freight costs, making continued F-Group use increasingly attractive. Where applicable, pre-shipment reporting requirements provide another reason for importers to use F-Group rules.

Domestic Use:

The buyer contracts for main carriage. There is no problem, provided that F-Group rules are not used in arrival contracts. There is no “FOB destination with Incoterms® rules.

THE C-GROUP INCOTERMS® RULES

All C-Group rules are used in shipment contracts.

International use:

The seller contracts for main carriage and is therefore in charge of carrier and usually forwarder selection.

Sellers

C-Group are by far the most seller-friendly Incoterms® rules. On one hand, the seller is in a position to give instructions to the carrier and forwarder that it appoints. This provides a comfort level for documentary-driven payment terms, with items subject to specific export controls, and those susceptible to commercial diversion. On the other hand, the seller’s risk for the condition of the contract goods ends somewhere prior to main carriage (at the first carrier with CPT and CIP, and with vessel loading with CFR and CIF). Export reporting is a seller responsibility under these rules, consistent with the FTR. Sellers that frequently select carriers are in a position to negotiate favorable freight rates. The only downsides are that there is more work involved than with F-Group rules, and more things to get wrong for inexperienced sellers. Also, sellers need to obtain excellent freight costs to make C-Group rules attractive to experienced buyers.

Buyers

Experienced buyers are not well served by C-Group rules unless their suppliers obtain exceptionally low freight costs. (Even then, a case could be made for D-Group rules.) The risk of being responsible for the condition of goods while they are in transit with a carrier selected and paid by someone else should be considered. Also, US importers must rely heavily on their suppliers with shipments subject to 10+2 reporting. Inexperienced buyers may be better served by letting their more experienced suppliers handle transportation, provided the freight costs are reasonable adequate insurance is in place.

THE D-GROUP INCOTERMS® RULES

All D-Group rules are used in arrival contracts. All are omni modal.

The arrival nature of D-Group rules causes revenue recognition issues, as the seller remains responsible for the condition of the contract goods until they arrive at the agreed place. This can be particularly important for publicly traded corporations wishing to recognize revenue at the earliest possible moment.

International use:

The seller contracts for main carriage and is therefore in charge of carrier and usually forwarder selection.

Sellers:

D-Group rules allow sellers to contract for transportation in return for being responsible for the performance of the carriers they select, which seems fair. This provides a comfort level with items subject to specific export controls or commercial diversion. Document-driven payment terms could be difficult, as shipping documents merely indicate that goods were shipped, not that they have arrived. (Parties often compromise on this by using shipping documents as triggers despite their inconclusive nature). Sellers that frequently select carriers are in a position to negotiate favorable freight rates. The downside is that there is more work than with F-Group rules, more risk than with C-Group rules, and the need to obtain attractive freight costs to make D-Group rules attractive to experienced buyers. DDP is a special case, involving a far higher level of risk.

Buyers:

For experienced buyers, this is the next best thing to F-Group rules when accompanied by low freight costs. Risk is far less than with C-Group rules. Inexperienced buyers will find D-Group rules particularly helpful.

International use:

Incoterms® 2010 rules even address domestic sales of customs-cleared imported goods with the new DAP as its name is “duty neutral” (unlike the previous DDU vs. DDP).

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